Interested in transferring assets to your children? There are two routes you can take-pass assets along while you’re alive, or leave them to your heirs when you die.
Not everybody wants to wait until they die to transfer assets. You might want to give cash, property or investments today to help your children with their finances.
A gift of cash is one of the easiest ways to transfer assets while you’re alive. Cash can help your children buy their first home, start a business, fund a Registered Retirement Savings Plan (RRSP) or help meet just about any other financial need.
If your child is 18 or older, there are no tax consequences for you or the recipient when you give money. And by giving cash now, you’ll transfer future tax liability to your children.
You may have other assets to pass along-such as securities, real estate, or business interests. In that case, things can be more complicated. The transfer of assets is unlikely to create immediate tax consequences for your child, but it can result in tax liabilities for you.
Transferred assets are generally deemed for tax purposes to have been sold (a “deemed disposition”), even if no actual sale takes place. The increase in the value of those assets is a capital gain and may increase your tax bill. The good news is that appreciation from the day of the transfer is taxable in the child’s hands.
You may be able to reduce taxes by giving assets to your child over a number of years, instead of all at once. A large gift can raise your marginal tax rate, and consequently the amount of tax you pay. Capital gains taxes can also be reduced if you have capital losses in the year of the gift or have unused capital losses from previous years.
Something else to consider when giving assets is that you lose control over them. If you want to retain control, consider setting up a trust to transfer assets to children while you’re alive and appoint yourself as trustee.
But you’ll still be on the hook for income taxes. In most cases you’ll pay capital gains taxes on the appreciation in value until the day assets are transferred. Depending on how you set up the trust, you may also be subject to taxes on income earned by those assets. Seek legal and tax advice when considering this arrangement.
Trusts are often used as an “estate freeze,” a strategy that freezes assets at their current value for tax purposes while you’re alive. You will have been deemed to have sold these assets and will be taxed on capital gains. However, future taxes are deferred until your beneficiaries sell the assets, or until their deaths. Estate freezes can be particularly useful when passing business assets along to children. The goal is to limit the value of the business that will be taxable upon your death and defer taxes on future growth to the next generation.
There may be other strategies you can use to transfer wealth before you die. For more information, consult your financial advisor.
